Whose interests is the mortgage bailout addressing?

AllFinancialMatters has a couple of great posts on the mortgage bailout proposals.

http://allfinancialmatters.com/2007/12/04/the-mortgage-bailout-plan-stinks/

http://allfinancialmatters.com/2007/12/05/the-tycoon-report-on-the-mortgage-bailout/

If you haven't heard, it's one of the leading subjects of the political debates: how to save homeowners in over their heads. The popular proposal now, and one that some lenders have already gone forward with on a limited basis, is freezing the rates of soon-to-adjust ARM loans for a specified number of years.

Everyone wants to know who is paying for these bailouts. Taxpayers? Why are we responsible for their problems? Shouldn't it be the bank's problem? Why should the government be involved at all?

Are Bush and Hillary really concerned about the American people and the poor citizens in danger of losing their homes? Or do they realize that massive foreclosures would results in housing prices readjusting to real market values, before the ridiculous housing "boom". With property values plummeting, states would lose billions in tax revenue. It makes you wonder who Uncle Sam is really looking out for.

Why did you take the ARM?

Countrywide is getting criticism for not permanently fixing the rates of several hundred thousand homeowners in risk of foreclosure. Part of this is being fueled by a protest group, NACA (or the Neighborhood Assistance Corporation of America).

If you take a look at their site, you will see all kinds of emotional statements designed to make you sympathetic to their cause, things that have nothing to do with subprime borrowers in foreclosure. Information such as "Chairman of Countrywide, one of the leading companies, is reported to have earned $22 million per year" seems to encourage the thought that because the CEO of a multi-billion dollar corporation is rich, he should forgive people who haven't been paying their mortgage.

These “geniuses” and their companies actually compensated their brokers and agents more if they marketed and closed loans containing abusive yield-spread premiums, low teaser and high re-set rates, and other costly loan terms and conditions

In other words, it worked like just about every commission based sale out there. Shocking that the company would give higher commission for a loan that makes the company more money.

Why on earth would the rates for these loans be so high? Why is lending to people with bad credit and lots of debt result in high rates? They answer it themselves: "almost one in every five subprime loan goes into default", yet they don't seem to make the connection. To be profitable, a bank has to get paid for the money it lends out. If a group of people tend to default at higher rates, their interest rate will be higher to ensure the bank doesn't lose money on those loans.

Modify every loan back to the rate at which these borrowers were or should have been qualified, and everyone wins. People can keep their homes and avoid financial ruin, and lenders can still receive payments on mortgages that borrowers can actually afford.

Here's the problem, NACA, they weren't qualified for payments they could afford. They were qualified for high interest adjustable rates, and that's exactly what they got. It is not the banks duty to set payments that someone can afford, it is the borrowers responsibility. What you are suggesting essentially shafts every single American paying a regular rate on a 30 year fixed.

These “genius” profit barons have pretended to create unparalleled homeownership opportunities for working people and families. Instead, they have preyed upon the most vulnerable, often based on a low credit score -- people with marginal credit and limited resources who could and should have obtained homes through fair lending practices. They charged people interest rates above 10% and often enticed them with teaser rates of 6% and less for the first two years.

The banks took a huge risk by putting these people into homes with teaser rates, when all the statistics showed that there was a high probability of default. To make such a venture profitable, they needed to charge higher interest rates later in the loan. These people could have used that time to rebuild their credit, save up to afford the new payments...anything. Instead, they rode along and when the teaser rate expired, cried foul. They can't refinance because, surprise, their credit still isn't any better.

Bottom line, it is not the banks responsibility to create a loan that is affordable to the borrower. Their only interest is in creating a loan that is profitable. It is the borrower's responsibility to determine whether that loan is affordable to them or not.

Banks don't want to foreclose. It costs money to foreclose. They end up with a house, which in all likelihood has been trashed by the deadbeat homeowner, that they have to sell for cheap at auction. They want you in your house, paying your mortgage, paying that interest. But because the group you fell into, that bad credit group, is a high risk and will default in higher numbers, your rate is higher in order to make up for the other deadbeats who do foreclose. Why is this so difficult to understand?

At the same time, some acknowledge that regardless of whether their loan is modified, some borrowers could lose their homes anyway because their financial situation is otherwise precarious.

"It all comes back to affordability," said Richard Pittman, housing services coordinator for ByDesign Financial Solutions, the Los Angeles branch of the Consumer Credit Counseling Service (CCCS). "As recently as 12 months ago, some were refinancing themselves out of their problems. A lot of them were just kidding themselves. They were fine through their second refi, but the third refi caused them problems."

Yes, I have read that a good number of these people in subprime loans in foreclosure, perhaps even the majority, are refinances. They refinanced equity to pay off their debts. This is the consequence of such a debtors lifestyle.

What is missing here? Case studies. No one appears to be asking these homeowners one very important question: "Why did you take the ARM?"...I would be very interested in hearing their answers.

The county tax office is in a sound proof cave

Home values are down. Many houses in my street are for sale, others for rent, and many are bank owned. They aren't selling well and prices are being slashed. Property values are just plummeting. The house down the street from me has gone up for sale 3 times this year. Another one has been sitting on the market for almost 2 years. This year and the next will be a low point in the value of my home, assuming it doesn't get worse.

But why worry about that when you can just ignore it? The county tax office has. My house has continually gone up in value in the middle of a housing crash. Whodathunkit. Its no wonder people are disputing their appraisals in record numbers. Also amusing, they have issued statements claiming a tax cut. Oh, our actual taxes in dollar amount has increased incredibly, but the tax rate has been slashed a meager .2%, and they think we're so stupid that we'll thank them for it. Yes, that sure will offset my 10% appraisal increase and ridiculously over-valued rate.

Disputing your tax appraisal is much the same in every state. You go in front of a panel of government officials, bring as much evidence as you can to prove what you feel is the real value of your property, and then try to make your case. In a few weeks you get a letter with your new (or old) appraised value. From what I hear from others who have done it, they usually lower your appraisal a tiny amount just to appease you and hope you won't appeal.

Of course unless you are a reasonably good public speaker, the whole procedure is pretty darn intimidating. I'm sure it's supposed to be.

The Black Death of the 21st Century

Here's an interesting article from MSN about a recent trend showing up in the wake of recent foreclosures. Mrs Rossman sums it up perfectly (emphasis on the two conflicting concepts added by me):

They opted to let their mortgage payments go while keeping current on all their cards. "I would rather be late on one thing than on several things," said Rossman, who works at a local church, pointing to the "very high interest rates" on their cards and the need to keep accessing credit. "But we can't just incur debt forever," Rossman, 24, also acknowledges. "We're cutting coupons, eating very cheaply and doing everything we can to stay within the budget."

Mrs Rossman gets an F for logic; better to not pay your mortgage than not pay your 6 credit cards. Late on 6 debts is worse than being late on 1 debt right? You are reading this right. This family (with a new baby no less) has decided to stop paying for their house so they can keep current on their credit cards. Why? Because they need them, and they can't stop spending.

The proliferation of no-money-down home loans over the past few years, coupled with the current housing downturn, is giving rise to a new mentality: People will risk losing their homes while doing everything to keep their credit cards.

Credit card companies are ecstatic, of course, because not only does this ensure more profit at the expense of the consumer's security but it opens a whole new market for them. Yes, right when we have ample evidence (via massive foreclosures) that lending money to people with sloppy credit or little income is a bad idea, credit card companies are targeting just that demographic.

As people such as Delana Dowdy in Darby, Mont., found out, falling home prices and tightening credit have made it harder to withdraw home equity to pay off debts such as credit card bills.

"The appraised value (of the house) didn't come high enough to consolidate our bills," said Dowdy, 36, who runs an antique store. Right now, she's behind on both her mortgage payment and card bills.

See, it never occurred to these people to just stop spending beyond their means, they are disappointed that they couldn't sign up for a new loan with some nice home equity to pay off their existing debt. As if that would be some kind of solution?

Teesa Rossman and her husband bought their house for about $135,000 two years ago with no money down. But a subsequent -- though temporary -- job loss and the birth of their first child have strained the Rockford, Ill., family's finances in recent months. Just last month, the couple found it impossible to pay all their bills and had to choose between making payments on their mortgage or their credit cards.

Why would you choose to keep a credit card company happy (and fat) rather than pay for your home? What will they do when they come home and find the locks changed and all their stuff on the sidewalk being picked through by their neighbors?

I have a reason. The same reason why a homeless man will buy a bottle of booze instead of a sandwich. Addiction. The people mentioned in this article and those like them are addicted to credit. They are addicted to creating their own lifestyle regardless of the cost, they are addicted to the materialism and the consumption of "stuff". Spending money makes them feel good, makes them feel successful, and gives them a false sense of security. What happens, then, is the music stops and they are scrambling for a chair, clipping coupons and eating Ramen noodles, but the one thing that put them in this situation - their insatiable need for credit - is the one thing they can't live without.

Credit addiction is the Black Death of the 21st century.

Newflash: When you borrow money you have to pay it back

What do economists think of the recent credit squeeze? Everyone is waiting for the rising foreclosures and sinking bad debts to trickle down to everyday consumers. Will we experience another depression? Will bread cost $10 a loaf?

"For the past 25 years, America has experienced a period of rising consumer debt," said Steven Fazzari, an economics professor at Washington University in St. Louis. "Up to now the high debt levels have had a positive influence on the economy. In fact, it was a stimulus to economic growth. But now it's likely to become a source of economic contraction."

How is increasing debt a positive influence on the economy? Sure, if you double your income by borrowing money you don't have, you can spend more. Is that good for the economy? Ask a marathon runner if it's a good idea to drink a gallon of coffee and start out in a blistering fast run.

"Our research suggests that we're facing a much more serious problem due to our consumption habits, that could have a much bigger impact,"

When you think about everyone who refinanced in order to cash out equity in their homes, they have been spending money that they didn't really have. Now their equity is gone, they can't pay back their loan, and the supply for their spending surplus is dried out. Now they have to live on their income alone, plus pay hefty monthly payments on all that debt they accumulated. It's no wonder they won't be spending much elsewhere.

"What will people do when offers for new credit cards don't show up in the mail three times a week? People won't be able to simply pay off old loans with new lines of credit. They'll be forced to service their debt, if they can."

Perish the thought.

Are homeowners entitled to a bailout?

According to Sheila in this Fox News article, you bet taxpayers should bailout homeowners facing the possibility of not paying their bills.

Do I agree? Heck no. Here's Sheila's letter (emphasis added by me):

We were shocked to learn that our mortgage is going up nearly $500 a month. We knew that buying this house a couple of years ago would stretch our finances to the limit, but we really wanted our kids to attend this school district so we decided to bite the bullet and keep to a very strict budget in order to make this work.

We both have jobs, but there’s no way we can come up with another $500. And home prices have really come down since we bought our house, so if we have to sell, we’d probably take a loss.

I’m just sick over this. I heard that President Bush has announced a program to help people like us. What can you tell us?

They "bit the bullet" and stretched their finances to the max with a home they could not afford by signing a loan with an introductory interest rate so their angel could attend a particular school. I sympathize with the feeling; you want your kids to grow up in a good school district. The problem is that if your two jobs can't afford for you to accomplish that goal, why exactly should government (taxpayer) funds subsidize your income?

That's exactly what this is for people like Sheila. They want the government to subsidize their income so they can live in a neighborhood with a good school.

Further, should people really be given tax free debt forgiveness because they paid too much for their house and now owe more than it is worth, and have a loan payment they can no longer afford? Hey, if the government wants to get rid of the forgiven debt tax, I might take a look and stand behind it - but not when it is exclusive to people who made bad choices when buying a house.

There are some people out there who are victims of mortgage fraud. Sheila sure doesn't sound like one of them. She just bought a house in a neighborhood she wanted, regardless of the terms or cost, and now finds herself in a financial hole. The consequences of the "have it now" mentality caught up with her, and she feels like a victim.

She is a victim. Of her own irresponsibility. I sympathize, and I wish her best. My advice to Sheila? Rather than standing on the street corner of Congress with your hand out, sell your house at a loss, take out a personal loan for the difference and start paying it off, and start living a lifestyle you can actually afford. Last time I checked, accountability and responsibility were in the dictionary, so she should have no problem looking them up.

Complain about bad loans, then advertise them

My local paper loves the subprime mess. They love reminding us that people took out horrible loans, ARMS, IOs, and that the resulting foreclosures are affecting the economy overall as well as the housing market. Not a day goes by that we don't get an article about it. At face value, it looks like the paper is doing its best to educate the public about these bad loans and the consequences of buying more house than you can afford.

Yet on their website right below the articles, on EVERY page (literally every page) they post advertisements for - you guessed it - bad loans. They are just random feel-good numbers with links to creepy lending sites asking for your social security number and other personal information with things like: $250,000 loan for $650 month! 4.9% interest rate!

Um, even at 4.9% a $250k loan at $650/mo would be paid off...well...never. A $650 payment would be adding around $250 to the balance of the loan every month. After 30 years you'd end up owing like $400,000.

The sad part is that just about all these news outlet websites have the same ads. Some are text, some have dancing aliens, all are outright lies. Where is the accountability in the advertising department? How can a credible newspaper claim to help educate the public in one hand and simultaneously trick them in the other hand?

Bush on the subprime market

If you haven't read/heard Bush's recent address on the subprime mortgage market, I suggest you take a look. While I'm not a Bush fan, I do like his general plan better than, say, Hilliary Clinton's. At least he doesn't just come out and say that he's going to funnel our tax money to pay people's mortgages.

Here are what I think are the highlights:

This market has seen tremendous innovation in recent years, as new lending products make credit available to more people. For the most part, this has been a positive development, and the reason why is millions of families have taken out mortgages to buy their homes

Hmm, but isn't that also why we've got this problem in the first place? There are really only 3 things that make a home (and the loan for it) more affordable and thus increasing homeownership overall.

• 1) Home prices drop
• 2) The loan price drops (lower interest rates)
• 3) The median income increases

None of these happened. The only thing left to do, then, is to extend the repayment period. That means funky loan products. The same products you, Bush, are so happy about created this problem.

This has led some homeowners to take out loans larger than they could afford based on overly-optimistic assumptions about the future performance of the housing market. Others may have been confused by the terms of their loan, or misled by irresponsible lenders. Whatever the reason they chose this kind of mortgage, some borrowers are now unable to make their monthly payments

Well, duh. The whole point of the ARM is to extend the loan period. Same with interest only. You get a low monthly payment for a period, then when you have sufficient equity to lower your LTV ratio and qualify you for a standard fixed. This is of course a nightmarish trap if you can't refinance, because your interest rate hikes to something more reflective of your risk to the lender and suddenly you can't pay the monthly dues. I'm no expert, but that's how I see it. Now instead of a 30 year loan you have a 35 year loan with a 5/25 ARM, thus allowing you to buy a house you can't afford.

You simply can't get more people into homes without either increasing their income or lowering the cost of the house. The math doesn't work. Instead you just encourage people who can't really afford homes to go into perpetual debt just to get one.

the government has got a role to play -- but it is limited. A federal bailout of lenders would only encourage a recurrence of the problem. It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford. Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders, or a little help from their government

I agree, but that is the root of the problem: people bought more house than they could logistically afford by using all these stupid loan products. They can negotiate with their lender but it all comes down to this: you owe X dollars, how are you going to pay it back? If you owe more than you can realistically pay back in, say, 30 years with some interest tacked on, you can't afford to stay in your house. Period. There is no room for negotiation, the only thing a lender can do is forgive some of the debt or extend the payback period.

Neither of these looks like a good solution. The first one means we're giving money to people who bought more house than they could afford. How is that fair to everyone else paying their mortgages in full? The second one means that they will be paying even MORE for the house AND will probably NEVER own the thing. Changing the tax code to help them even more sounds like welfare.

This administration will soon issue regulations that require mortgage brokers to fully disclose their fees and closing costs. We're pursuing wrongdoing and fraud in the mortgage industry through the Department of Housing and Urban Development, the Department of Justice, the Federal Trade Commission, and other agencies.

Well good! But the disclosures are already there on the mortgage contract. People who don't understand the terms or the contracts they are signing should hire a lawyer to explain it to them. If they can't afford a lawyer (who would probably charge a few hundred bucks for such a task) how can they afford a home?

So here's a glimpse into his plan, apparently.

Sixteen months ago I sent Congress an FHA modernization bill that would help more homeowners qualify for this insurance by lowering down-payment requirements, by increasing loan limits and providing more flexibility in pricing. These reforms would allow the FHA to reach families that need help, those with low incomes and less-than-perfect credit records or little savings...Congress hasn't acted this year. It would be a good task for Congress to come and get FHA modernization done so that we can help these people refinance their homes, so more people can stay in their homes

Am I reading this right? You made a bunch of reforms that sunk people into loans they can't afford so the solution is to make more reforms to keep them in those homes? If they have bad credit, low incomes, and no savings, they should rent! Build up savings, improve your credit, make more money, then buy a house you can afford. Don't game the system just so someone can have a house without putting in any actual effort to get it.

Homeownership is a splendid goal...when you've earned it.

Surge in subprime advertising?

Back from vacation! With all the problems of the subprime market, is it just me or does it seem like advertising for these horrible loans has actually increased? I cannot visit a single website without seeing an add for a $500,000 loan for $900/mo. or some other such deal. The dancing green aliens and wide-eyed cute animal Flash ads are everywhere. Out of curiosity, I tried clicking on a few but none of them would disclose the terms of their so-called loan without entering an SSN. But it's quite obvious that these are not good loans. The payments they claim would not even cover the interest on a 50 year loan even if I assume a ridiculously low rate, like 1%, with the balances they are advertising. Further, they sometimes include interest rates that are so far below the actual rates being assigned to mortgages it isn't funny.

I wonder why these ads exist, and worse how reputable online news outlets can display them next to an article about someone foreclosing on their house after their 2/28 IO ARM readjusted.

Near as I can tell, every single one of these ads is full of it. So why do they exist, and why are sites willing to display them?

Democrats and subprime mortgages

The word from the democrats on subprime mortgages is an all too familiar one: We need more regulation, its not your fault, someone else is always to blame.

I would be upset if my bank gave me a higher interest rate than I deserved. You protect yourself by shopping around. Does that lead me to foreclosure? Of course not, it just means I'm buying less house and paying more interest. Foreclosures are up because of one thing: homebuyers can no longer afford their payments. This is a combination of poor loan terms, inflated appraisals, and lots of easy credit. However all of this comes down to the person signing up. Your payment is right there on the document. Is it an adjustable rate? Then why are you signing up for a monthly payment you can barely afford knowing it will increase in 2, 3, or 5 years?

There are many people taking (and who do bear) the blame: brokers, lenders, Wall Street. See anyone missing from that list?

Instead, they call for more regulation. Isn't a bank supposed to make money? Shouldn't they be charging what the market will bear and what customers will pay? Why should the government regulate how their commissions work? Doesn't competition between banks already regulate that?

Some other things they would like to get rid of.

Prepayment penalties: I didn't sign up for one, but I know people who did. Isn't this an incorporation into the expected profits of the lender? If I don't plan on moving for 5 years, and they will lower my rate or origination fees if I accept a prepayment penalty clause, isn't that good for me the consumer? If I suddenly want to move after 3 years, why shouldn't I fulfill those obligations that I agreed to? If I don't want a prepayment penalty, I can just refuse it. If one bank won't agree, another will.

Tighter underwriting standards: Judging a persons ability to repay the loan is a risk factor for the bank. If they are willing to take the risk, I say let them. When they cry to the Feds that they are going bankrupt, tell them to pound sand. Taking on a mortgage you can't afford is a risk for the consumer. If you take a loan with a payment based on a teaser rate that you can barely afford, and you can't afford the new payment with the teaser rate goes away, you gambled and lost.

Require escrows: I have an escrow account. But why force lenders to use them? Consumers would be better off saving on their own, accumulating interest and paying taxes/interest themselves.

Eliminate no-doc loans: If a consumer wants to state their income, and a banker is willing to take that risk, why is this a concern? If the customer lies on the loan, prosecute them.

None of these solves the underlying problem - people buying more house than they can afford. Maybe instead of more regulation we should be promoting more consumer education?

Subprime Woes: How do you get in this bad situation?

In this bankrate article, Tara writes in asking what she can do to save her home.

She writes:

Is it OK to try to refinance our home for a lower monthly payment even though we know that we will most likely be filing for Chapter 13 bankruptcy in three months -- when my savings run out and our second home goes into foreclosure?

We currently have an interest-only payment loan that eats up 63 percent of our monthly income.

Not only does Tara have an interest only loan that consumes 63% of their income, but they have a second home as well?


Even if their home (that they are living in) has a higher interest rate, what good would refinancing do? 63% of your income is an enormous amount to be spending on a mortgage. Tara lives in a house she can't afford, and unless she can fit herself into a 30 year fixed conventional loan, she needs to sell and start renting. But it gets worse because she has 2 homes!

I wonder how she got in such a mess? A job loss? An ARM on the second home? Need we ask about any car loans and credit card debt? Frankly, I wonder if Tara is really bankrupt. With an interest only she may well owe more than the house is worth, but it also may be possible to simply sell both houses and take a personal loan out for the difference. Is it fair to the lender that they pay for Tara's irresponsibility?